 The Market Sum | Insight after the bell
By Caleb Silver, Editor in Chief Friday's Headlines 1. Markets Spike on Positive Trade, Brexit and Consumer News 2. Partial Trade Deal Includes More Agricultural Purchases and Currency Rules 3. U.S. Consumer Sentiment Climbs 4. Hope Alive on Brexit Negotiations 5. What to Expect Next Week Markets Closed
Year-to-Date
 Image: Getty Images
Markets Today
Investors got almost everything they could've asked for today.
The U.S. and China agreed on a 'partial deal', or what President Trump called the 'first phase of a substantive trade deal', that will be written over the next three weeks.
As part of the deal, China agreed to purchase between $40 billion and $50 billion in U.S. agricultural products, and Trump said the two sides made progress on negotiations around currency issues. Remember, Trump has been calling China a currency manipulator since he was just a presidential candidate. The U.S. Treasury Dept. also officially labeled China a currency manipulator earlier this year.
For its part, the U.S. agreed to postpone a new round of tariffs that were set to go into effect on October 15th. It's still uncertain what will happen to the next round of tariffs that were scheduled for December 15th, but it will probably depend on the next phase of talks.
Global markets rallied as the prospects of a larger deal seem possible, and a veil of uncertainty has been lifted for the time being. The DJIA rallied as much as 500 points before selling off to close up 319 points.
Here's what else happened:
At the end of the day, and the end of what seemed like a long week, the S&P 500 is just 1.84% away from its all-time high, courtesy of YCHARTS.  And here's a classic chart of the S&P 500 for all you purists out there.  Consumer Sentiment Stronger than Expected Soft data alert... but this hits hard given the importance of the almighty consumer right now.
The Univ. of Michigan Consumer Sentiment Survey for October came in stronger than expected, hitting a three month high. This, despite the hand wringing about the trade war, impeachment inquiries, recession fears, and Halloween. Consumers, who have been the only strong leg of the U.S. economy for months, continue to show resilience, buoyed by low unemployment, cheap gas, and low borrowing costs.
The main reason for their confidence, according to the survey, is that consumers feel that their incomes will grow in the next 12 months.  If consumers feel that way, they are likely to continue spending. Since inflation has remained somewhat tame and there have not been many economic shocks to rock their confidence, U.S. consumers continue to carry the economy on their backs. That said, debt levels are at all-time highs for credit cards and some consumer loans, but that has never stopped the American spender.
We'll hear more about them directly from the companies they purchase from as earnings season gets underway in the next couple of weeks.
The Fed Details Balance Sheet Expansion Plan
(Warning: I'm about to go deep into the mysteries of the Treasuries and Repo Markets which is pretty arcane and not that scintillating. The TL;DR version of this section is that the Federal Reserve has come to the rescue again by promising to inject a lot of money into the overnight lending and U.S. Treasuries markets to keep them both stable. The Fed said it would do this, and today it provided details. Feel free to skip to the next section... I won't be offended.)
As we mentioned earlier this week, the Federal Reserve is taking measures to make sure its balance sheet is strong and that there is ample liquidity in the treasuries market in order to keep the federal funds rate in its target range of 1.75%-2.0%.
Why is the Fed Worried About the Repo Market? Several of our readers have written to ask why the Fed is worried about the so-called repo market, and why they are taking these measures now. It's a good question.
What is the Repo Market? A repo or repurchase agreement, is when one party - typically a bank, but not always - lends out cash in exchange for the equivalent value of securities, which are often Treasury notes. This market exists to allow companies that own lots of securities but are short on cash to borrow money on the cheap. On the other side, it allows companies or banks with lots of cash to earn a small return while taking little risk, because they hold the securities as collateral. These transactions can take place over weeks or months, but often just overnight. The cash borrower agrees to repurchase those securities at a later date at a higher price. The repo rate is determined by the difference in price. Rates on repurchase agreements can rise when there is a shortage of cash in the system for one reason or another.
Banks, hedge funds, and broker-dealers need cash to fund their operations, so they are typically the lenders of securities (usually Treasury bills) in the repo market. The cash providers are typically money market funds or other asset managers that are long on cash, and looking for a place to earn a little interest. If you have money in a money market fund, part of the interest you earn is based on what your money market fund earns in the repo market and through other transactions.
Repo rates are usually closely aligned with the federal funds rate under normal circumstances. Occasionally, however, they veer from that rate in either direction. When repo rates spike, it's a sign that there is not enough cash in the repo market, which allows lenders to earn more on the their money.
That happened on September 17th.  I 'borrowed' that chart from the WSJ, which has a really clear explanation of what happened on Sept 17th. I'll do my best to break it down.
For years following the financial crisis, the Federal Reserve used a tactic called quantitative easing wherein it would buy U.S. Treasuries to make sure there was liquidity in the market. It was a way of showing the banking system, which was still smarting from the liquidity crisis that underpinned the financial crisis, that the Fed had its back. It was the buyer of last resort.
In 2017 the Fed announced it was ending QE, and would become a seller of U.S. Treasuries. It was 'shrinking its balance sheet', in other words. Cash reserves at the Fed fell as low as $1.5 trillion from a high of $2.8 trillion
On September 16th, corporations had to pay their taxes to the Treasury, and Treasury had to settle its debt auctions, which led to large transfers of cash from the banking system. Suddenly, the repo market was light on cash, causing repo rates to spike as high as 10%, catching traders and banks off guard. There was a slight panic in the Treasuries market, causing rates at all durations to spike. Remember, the value of the Treasuries market is about $15.6 trillion. If it sneezes, we all catch a cold.
The Fed realized that it has to be the liquidity backstop in the repo market. It took away the proverbial punch bowl when it stopped buying securities, and the partygoers found themselves flat footed.
By resuming its activity in the repo market by injecting as much as $35 billion into the market twice a week, the Fed is ensuring that short term rates won't spike again. But, Chairman Powell insists this is not quantitative easing. OK, Jay...
Simultaneously, the Fed announced that it will resume buying Treasury bills at various durations on the order of $60 billion a month until at least January. That guarantees that there will also be a buyer for U.S. Treasuries, which should keep prices and yields relatively stable. In case you hadn't noticed, they have been anything but stable in the past year.  Brexit Deal Hopes...Really! See that spike in the British Pound against the U.S. Dollar? That's a reflection of the fact that there might actually be a chance of a real Brexit deal by the October 31st deadline.
According to various reports, British PM Boris Johnson has had an about face on his stance that there must be customs border between Ireland, which is part of the EU, and Northern Ireland, which is part of the U.K. The Irish border has been one of the key sticking points in the Brexit negotiations between the EU and the U.K.
As The Guardian reports, under a possible plan, Northern Ireland would leave the EU customs union but the UK would agree to enforce the bloc's customs rules and tariffs on goods moving from Britain to Northern Ireland that would include a rebate system to compensate businesses impacted by Brexit.
It's far from a done deal and there are less than 20 days to go before the October 31 deadline, but this is one of the first breakthroughs we've seen in months. What to Expect Next Week: We know not to expect a new round of U.S. tariffs on Chinese goods next week.
But there is plenty going on that will impact markets.
Monday
Tuesday
Wednesday
Thursday
Earnings Season Begins Third quarter earnings season gets underway next week, and while that quarter is deep in our rear view mirrors, its what companies say about the future that we care about.
About 180 companies in the S&P 500 report next week, and the banks really kick things off on Tuesday with JPMorgan, Citigroup, and Goldman Sachs among the majors reporting results. Lower interest rates impact their net interest income (the money they make by borrowing low and lending higher), but positive news on the trade front will help their businesses, a lot.
We'll also hear from the online brokers like E*TRADE next week. Their businesses have been rocked by the zero commission battle we have been telling you about, so it will be interesting to see what they say about how they will make up for that last revenue.
One last thing I will leave you with... They used to say, 'Sell in May and Go Away', around the stock market. One of the reasons they say that is because November usually kicks off the best 6 months of performance for U.S. markets. We're not saying it will be that way this year, but the positive news from the trade talks may help this year...We'll see. Our pal JC Parets shared this chart.
Enjoy. 
(chart courtesy YCHARTS)  Industrial supply company Fastenal skyrocketed up 17.6% on an earnings beat. Mining firm Freeport-McMoRan continued to rise 7.6%, following a substantial rise yesterday. Other winners include phosphate miner Mosaic, which rose 7.7%, and casino firm Wynn Resorts which went up 6.3%.  Edison International fell 3.9% as wildfires raged in California, causing problems for both Edison and fellow utility company PG&E. Gold mining company Newmont Goldcorp lost 3.7% as gold prices dropped. Word of the Day We chose this, because Facebook continues to lose partners for its digital currency that is also known as Libra coin. Paypal backed out of the consortium last week, and today, Mastercard, Visa, eBay and Stripe all said they will also take a pass.
Facebook, which also owns WhatsApp and Instagram, planned to launch its payments platform in about a dozen countries by the first quarter of 2020 even though its cryptocurrency, which was first called Globalcoin, has faced intense scrutiny from regulators, the Federal Reserve and the U.S. Treasury.  Today in History October 10th, 1950: The FCC grants a license for CBS to broadcast color television. This led to an immediate lawsuit by competitor RCA which dragged on until May 1951. The suit drew attention to the fact that NBC's standard didn't work on traditional TV sets, and would require to either buy a new color TV or an expensive converter. RCA gained a substantial market-share advantage during the fight and developed its own color system. The FCC reversed its decision in 1953, adopting RCA's system. Color was still slow to catch on, with sales of color TV's not eclipsing that of black and white TV's until 1972.
https://www.soundandvision.com/content/65-years-ago-today-first-color-tvs-arrive
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Friday, October 11, 2019
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